"[Higher] crude usually puts a bit of a dampener on cracks," a trader said. "As prices rally, it generally starts eating into petrochemical margins and demand for naphtha will [usually] come off."
Crack spreads measure the relative value of products to the crude oil from which they are produced.
With ICE Brent futures rising to more than $89/b Thursday morning, overnight gains in naphtha's front-month crack were confusing to some traders.
In the over-the-counter market this week, naphtha's crack rallied, climbing by more than 85 cents Wednesday from Tuesday's close to minus $0.25/barrel. Levels heard in the market Thursday demonstrated a further upside move of around 20 cents to reach minus $0.05/b.
Outright NWE naphtha prices have been buoyed by western crude oil benchmarks, rising to over a two-year high Wednesday of $792/mt.
"Technically oil looks bullish. The stats indicated quite big draws," a trader said, referring to US Energy Information Administration data released Wednesday that showed a 3.27 million barrel draw in US stock inventories.
With outright naphtha prices surpassing levels last seen at the end of Q3 2008, traders have been surprised that its performance against crude continues to strengthen.
"At these levels, petrochemicals will begin to struggle buying [at the] flat price, as downstream margins are pressured. I would have thought they might hold off but it's not yet certain how much more crude will rally further," a trader said.
